Two years ago, an American friend took me on a helicopter ride from Jerusalem to the Golan Heights over the Palestinian West Bank. He wanted to show me how vulnerable Israel was, how the Arabs only had to cross 11km of land to reach the sea and throw the Israelis into it. I got this message but I also came away with another one. When I looked down at the West Bank, at the settlements like Crusader forts occupying the high ground, at the Israeli security cordon along the Jordan river closing off the Palestinian lands from Jordan, I knew I was not looking down at a state or the beginnings of one, but at a Bantustan, one of those pseudo-states created in the dying years of apartheid to keep the African population under control.

That was when I understood that for all their talk about a two-state solution, both sides never inhabited the same universe of discourse about what it actually meant. It is not just that both sides failed to make peace, but that peace never meant the same thing.

Given who Arafat was and is, it required extraordinary vision by Israelis to understand that their security depended on having a strong neighbour in Palestine, not a weak one. The Israelis failed to realise that they needed a Palestinian Authority capable of providing enough services for its population to keep them from wanting to kill Israelis, and enough military and police capability to stop them if they tried. The Palestinians equally failed to understand that a good neighbour is a strong one. Many wanted a state of their own, to weaken Israel and prepare the final conquest of Tel Aviv.

Both sides have an equal share of blame in the slow collapse of the two-state solution. The Palestinian leadership degenerated into a venal tyranny, holding back an increasingly frustrated Palestinian civil society. The Palestinian Authority also failed because Israel never allowed it to become a state. When authorities cannot become competent states, when they cannot meet the needs of their people, they can only survive by playing to the longing of their populations to counter humiliation with acts of suicidal revenge. Had Israel realised that its own security depended on assisting in the establishment of a viable and, if necessary, ruthless Palestinian Authority it might now be secure. But making the Authority work was incompatible with the parallel policy of establishing settlements. Settlements cut Palestine into pieces, and sent a message to the population that they would never actually have a viable state of their own. Settlement policy acted against the Israeli state's vital security interests, and so Israel will have to choose between its own survival and the survival of the settlements.

Now that its troops have pillaged the offices of the Palestinian Authority, confiscated hard-drives, emptied safes, destroyed records, Israel has destroyed the one entity that might be able to control the territory it cannot. Repressing a population bent on national independence destroyed the French Fourth Republic in Algeria, and it will kill Israel. Absorbing the entire Palestinian population into Israel as equal citizens would be an excellent idea, but it is neither what Palestinians want, nor is it compatible with the continued existence of Jewish majority rule in the Jewish state. Expelling the Palestinians across the river into Jordan, another extremist option, will only start a regional, and possibly nuclear, war. Building a wall to keep an enraged people out, the current strategy of desperation, will reduce but not stop terror attacks.

If all this is true, Israel's only remaining guarantee of security is the recreation of a viable Palestinian state, with a monopoly on the means of violence, and the capacity to genuinely provide jobs and services for its people. In committing itself to speedy and complete withdrawal, it will have to commit to a strategic realignment based on the paradox that Israel as a state may have no longer term future unless Palestinians have their own.

All catastrophes are also moments of opportunity. Both sides have taught each other a lesson, and these lessons all point in the direction of peace. The Israeli action in the West Bank, brutal as it was, made it clear to suicide bombers that their own people will play a high price for the massacre of Israelis. Asymmetrical warfare does not give all the advantages to the weak. There remain some terrible advantages of the strong - the advantages of tanks, bulldozers, aircraft and missiles.

If the Palestinians have been taught a terrible lesson, the Israelis now have learned that the weak have weapons that can penetrate the defences of the strong. Israel knows it can defend itself against suicide bombers, but at a price no Israeli actually wants to pay, the death of public life and the casual freedom that makes existence worthwhile.

Both sides, moreover, are not just angry and embittered; they are also exhausted and traumatised. Both have suffered enough, and both have the bitter feeling that they are led by people who are incapable of making peace.

Eighteen months of extremism on both sides ought to return everyone to the realities: that loveless coexistence and separation within two secure states is the only political future that does not involve the indefinite sacrifice of the young people on both sides in a mutually reinforcing death cult.

But it is also equally clear that neither side is capable of making peace, or even sitting in the same room to discuss it. The Americans now face a historic choice. For 50 years, they have played the double game of both guaranteeing Israel's security and serving as honest broker in the region. This game can't go on. Either America gave a tacit green light to the Israeli operation, or it tried to restrain Sharon and failed. Either way, now that the Powell peace mission has failed, the American president looks ridiculous or devious, or both. He can't withdraw and he can't stand the embarrassment of continued diplomacy without result. The prestige and leadership of the United States, its vital national interests, are now on the line. Without a settlement in the Middle East, it has no possibility of support from Arab governments in its campaign against Islamist terrorists. Middle East peace has moved from a desirable option in American policy, to an utter necessity. The Saudi offer of eventual recognition for Israel in return for a state in Palestine is an opportunity that must not be lost. The only way to seize the opportunity is to impose a two-state solution now, before the extremists succeed in removing it from the realm of possibility forever. The Europeans have funded much of the Palestinian Authority. They must now help to rebuild it quickly. Otherwise there will be no authority in the West Bank at all.

The time for endless negotiation between the parties is past: it is time to say that all but those settlements right on the 1967 green line must go; that the right of return is incompatible with peace and security in the region and the right must be extinguished with a cash settlement; that the UN, with funding from Europe, will establish a transitional administration to help the Palestinian state back on its feet and then prepare the ground for new elections before exiting; and, most of all, the US must then commit its own troops, and those of willing allies, not to police a ceasefire, but to enforce the solution that provides security for both populations.

Imposing a peace of this amplitude on both parties, and committing the troops to back it up, would be the most dramatic exercise of presidential leadership since the Cuban missile crisis. Nothing less dramatic than this will prevent the Middle East from descending into an inferno.

· Michael Ignatieff is director of the Carr centre for human rights policy, Kennedy school of government, Harvard University